Valuing Your Business

Retirement. Loan applications. Shareholder buyouts. Divorce. Understanding what improvements drive the most value. There are many reasons to value your business. But, manufacturers cannot necessarily find the answer on the face of their balance sheet — or rely on industry rules of thumb. Instead, you will need to hire a business valuation professional to get a reliable estimate.

Valuators bring value

If you Google "valuation rules of thumb for manufacturers," a wide range of results will appear. A common valuation rule of thumb for manufacturers is four to five times earnings before interest, taxes, depreciation and amortization (EBITDA). But, many businesses sell for more (or less) than this range depending on the buyer, the industry and the performance of the company.

This oversimplified formula can serve as a useful sanity check for a purchase offer. However, you should not rely on it alone when selling your business, because it is arguably the most important business decision you will ever face.

Tangible assets — such as receivables, inventory and equipment — are important to manufacturers. However, in a technology-driven, relationship-based market, intangibles — such as customer lists, patents, assembled workforce and goodwill — also contribute significant value. Professional valuators generally look beyond the cost approach and, instead, rely on market or income-based methods when valuing businesses in the manufacturing sector.

Let the market decide

Under the market approach, sales of comparable public stocks or private companies may be used to value your business. Finding comparables can be tricky, however. Many small, private manufacturers tend to be "pure players," whereas public companies tend to be conglomerates, making meaningful public stock comparisons difficult.

When researching transaction databases, it is essential to filter deals using relevant criteria, such as industrial classification codes, size and location. Adjustments may be required to account for differences in financial performance and to arrive at a cash-equivalent value, if comparable transactions include non-cash terms and future payouts, such as earn-outs or installment payments.

Cash is king

Under the income approach, expected future cash flows can be converted to present value to determine how much investors will pay for a business interest. Reported earnings may need to be adjusted for a variety of items, such as...